Income tax reform refers to the various amendments and modifications that are carried out in the income tax infrastructure. Income tax reforms are important in creating a stable and transparent income tax infrastructure.
Income tax reform is always an important issue. In the United States, federal income tax reform is one of the priority issues that are dealt by the Government of United States. The characteristics of reform propositions in the United States continue to be reasonably uniform. At present, the argument is on for an approach towards hybrid reform, for example, an income tax infrastructure with both a consumption and an income tax or important constituents of both.
The important issues that would influence the revenues from federal taxes are the following:
The baby boom generation would begin retiring
- The tax reliefs for the years 2001 and 2003 would be taken out
- The Alternative Minimum Tax would increase substantially
At present, there are three suggestions that have been put forth regarding tax reforms. The first one advises about reforming the present infrastructure instead of replacing it. This is basically a bottom up approach. The second suggestion proposes about replacing the total present tax infrastructure (or principal components of that) with a new one. This is also known as fundamental tax reform.
According to this concept, the five principal alternatives of consumption tax are the following:
- Credit-invoice value-added tax (or VAT)
- Retail sales tax
- "The flat tax" (which is a single-rate consumption tax)
- Subtraction-method VAT
- Personal consumption tax
The third suggestion speaks about a hybrid approach that will involve the characteristics of both consumption tax and income tax.
The objectives for the assessment of the income tax reform propositions are the following:
- Fairness: There should be uniformity on the imposition of taxes
- Simplicity: The tax regulations should be uncomplicated and comprehensible by the taxpayers.
- Neutrality: The tax regulations should be neutral in its essence
- Economic development and effectiveness: The tax infrastructure should not hinder or diminish the efficiency or productivity of the economy
- Minimized noncompliance: A tax has to be designed for minimizing noncompliance
- Cost-efficient collection: The expenses for collection of tax has to be maintained at a minimum for both the taxpayers and government
- Transparency: The taxpayers should have a clear notion about the different types of tax and when and how they are levied
- Certainty: The tax regulations have to distinctly delineate the time for payment of tax, what is the method of payment, and the amount of payment
- Influence on government revenues: The tax infrastructure has to facilitate the government in ascertaining the amount of tax revenue that should be collected and the time of collection
- Payment convenience: The tax should be collected when it is suitable from the taxpayer's perspective